Cash-strapped municipalities and the state are getting more aggressive in their tax audits, according to tax accountants, lawyers and some businesses whose books are under review.

Companies report being doggedly pursued by auditors for taxes they say are questionable and being told to pay taxes that weren’t collected before, local tax experts said.

But officials with the Colorado Department of Revenue and the city and county of Denver said they haven’t stepped up their tax audits or changed collection methods. The number of state tax audits is down 10 percent over the past two years. Denver, however, saw a 58 percent jump in disputes filed by taxpayers in 2009, which may indicate businesses are more inclined to fight tax assessments in a down economy.

Bruce Nelson, senior tax manager with Ehrhardt Keefe Steiner & Hottman, said municipalities and the state began coming down harder on businesses about a year ago after their budgets began to buckle. Nelson was the state’s manager of tax policy under former Gov. Bill Owens and left that position in early 2006.

“I think they’ve tried to increase their audit coverage” since last spring, he said. “We’re also seeing that the auditors are much more aggressive than in the past. Things they probably wouldn’t have picked up, now they pick it all up.”

One of his clients recently was hit with a major assessment by Denver on taxes the city hadn’t singled out on seven or eight previous audits, he said.

“It’s not a big surprise,” he said of aggressive auditing. “They’re really bleeding badly.”

Photography view differs

Dann Coffey, a commercial photographer based in Edwards, is protesting a recent state audit. He doesn’t charge customers sales taxes on his photography because it’s a service, he said.

But state auditors said he owes up to $3,000 in taxes, interest and fees on his resale of stock photos from previous shoots going back to 2006. Coffey said he’s selling a license to use the images and he retains the copyright, so the resales shouldn’t be taxed; the state said the transactions constitute the taxable sale of tangible property.

“If they try to use me as the poster child for this wrong-headed position, then it’s going to affect all photographers in the state,” he said.

Colorado photographers generally don’t pay state taxes when they sell licensed use of their work, said Mc Cory James, president of the Colorado chapter of the American Society of Media Photographers.

“Sometimes, the department and the taxpayer disagree over audit matters, such as whether the sale should be classified as the sale of tangible personal property or a nontaxable license agreement,” he said. “Such a disagreement is definitely not the result of a change in our position nor an overly aggressive stance.”

Denver hasn’t stepped up its efforts to boost flagging revenue, said Steve Ellington, the city’s director of tax compliance and acting treasurer.

“Denver is not any more aggressive or assertive in auditing or collecting taxes,” Ellington said. “The purpose of the audit function is education, to assist businesses in being able to comply with Denver’s tax laws, as well as make sure the taxes owed to Denver are paid.”

Denver closed 693 tax compliance audits last year compared with 535 in 2008, but the numbers aren’t comparable because the city combined two auditing departments in 2009, he said. There was no net increase in auditors. The city collected $31.6 million from all audits last year, down from $35.7 million in 2008 but up from $23.6 million in 2007.

Nearly two-thirds of the money Denver collects in audits comes in the form of use taxes, which businesses are supposed to self-report and pay on purchases that did not include a sales-tax charge, such as those made from out-of-state retailers.

Tax disputes with the city, which may or may not have arisen from audits, rose to 143 last year from 90 in 2008, Ellington said.

One current dispute involves a Denver company that’s been told by the city that it owes taxes on leases in which the customer did not pay rent, said Adam Chase, the company’s Boulder-based attorney.

“They’re saying you owe taxes even if you have a loss for the transaction,” he said. “We have tried reasoning with them, but they’re not budging.”

Lawyer cites aggressiveness

Chase represented Sysco Denver Food Services last year in a battle with Denver over its attempt to begin collecting a separate sales tax on frying oil. The Denver City Council killed the idea after restaurants organized a fight, claiming they pay taxes on total sales, including oil.

The city of Boulder is being sued by one of its largest private-sector employers, Ball Aerospace & Technologies Corp., over a $182,000 assessment. The city said in an audit last year Ball owed the city use taxes on downloaded software; Ball claims such software is intangible property and therefore not taxable.

Most businesses choose not to protest their audits. Even if they believe they’ve been wronged, attorneys’ fees can easily outweigh any gains made through a protest.

The owner of one small business in Denver expressed shock at the level of scrutiny the company was subjected to in a recent audit by Denver. The city found that the business owed tens of thousands of dollars of use taxes on computer equipment and seemingly minor items such as food bought for the office or Christmas cards.

The business owner, who asked not to be identified to avoid retribution from the city, was frustrated by how complex and opaque the business tax system is.

“Technically I’m wrong, but it seems not very fair or just,” the owner said. “All the differences in tax law between state and all the cities, it becomes a burden for someone like me. There’s something wrong when a company is trying to do it right and can’t.”

Denver Postee since 1998. Previously worked at Denver Business Journal, Littleton Independent and City News Bureau of Chicago. Colorado College and Columbia University grad. Knight-Bagehot fellow in 2007-08. Married to Marta. Two teen daughters. Ski, cycle, hike, climb, backpack, cook, read, travel.